Law governing the agreement to have recourse to arbitration: the common law approach
The law governing the arbitration agreement is not necessarily the same law as that which governs the substantive dispute. Often a clause in a contract that addresses applicable law will be concerned only with the substantive dispute and not detail the law governing the arbitration agreement. This may cause difficulty and it is good practice in the arbitration agreement itself to set out what law applies to it. If there is no express choice made, and applicable law in respect of the arbitration agreement becomes an issue, it will become necessary for a determination to be made as to which law applies – usually the law of the seat of arbitration or the law that governs the substantive contract.
It might be thought that, notwithstanding the doctrine of separability, it would seem reasonable for there to be a strong presumption that the law governing the substantive agreement also governs the arbitration clause. However, the doctrine of separability is such that the arbitration clause is autonomous and by its very nature separable from the rest of the contract.
Indeed, it is a clause that may standalone, even where the substantive contract is void. As such, an arbitration clause may indeed be governed by a law different from that governing the main contract.
The separability of the arbitration clause has given rise to instances across many jurisdictions in which a tribunal or court has decided, in the absence of an express choice by the parties, that it is the law of the seat of the arbitration, not of the substantive agreement, that governs the arbitration agreement itself. That is an approach adopted by the London Court of International Arbitration (LCIA) and reflected in the LCIA Rules 2020: Article 16.4.
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International Arbitration: Frameworks and Drafting an Arbitration Agreement
Subject to Article 16.5 below, the law applicable to the Arbitration Agreement and the arbitration shall be the law applicable at the seat of the arbitration, unless and to the extent that the parties have agreed in writing on the application of other laws or rules of law and such agreement is not prohibited by the law applicable at the arbitral seat.
Article 16.5 Notwithstanding Article 16.4, the LCIA Rules shall be interpreted in accordance with the laws of England.
In recent years, courts in the major arbitral jurisdictions have considered the law applicable to the arbitration agreement where the parties have not made an express choice. Until recently, the principal common law authority was the English Court of Appeal decision in Sulamérica Cia Nacional de Seguros S.A. v. Enesa Engenharia S.A.  EWCA Civ 638. In that case, it was held that the governing law of the arbitration agreement was English law, even though there was a clause providing that the substantive contract was governed by Brazilian law.
The Court of Appeal set out a three-stage test, reflecting the common law position: 1. If an express choice of law has been made by the parties to govern the arbitration agreement, it is that choice that will be the determining factor, no matter what law is applicable to the contract as a whole.
- Where the parties have not specified the law of the arbitration agreement, the question of whether the parties have made an implied choice of law must be asked.
- Where it is not possible to establish the law governing the arbitration agreement even by implied choice, it is necessary to consider which law has the “closest and most real connection” with the arbitration agreement.
The Court went on to say that, where there has been no express choice made, it was appropriate to start from an assumption that the parties intended their relationship as a whole (both substantive contract and arbitration agreement) to be governed by the same law. This reflects the common situation where the same law governs both the arbitration agreement and the substantive contract, whilst the law governing the arbitration proceeding itself and its procedure (the lex arbitri) is typically the law of the seat of the arbitration. On the facts of the SulAmérica case, the arbitration agreement would only have been enforceable under Brazilian law with the consent of the party making the insurance claim, Enesa.
The Court of Appeal therefore found that there was a very real risk that, by applying Brazil law, the arbitration agreement would be completely undermined. That risk indicated that Brazilian law could not have been the implied choice of the parties. In addition, London had been chosen as the seat of arbitration, with English law therefore applying to the conduct of the proceeding and its procedure. That suggested that there was an intention on the part of the parties for English law to govern all aspects of the arbitration agreement (in the absence of any indication to the contrary).
The Court also held that, in all the circumstances, the arbitration agreement had its closest and real connection with the law of the arbitral seat, given that it was that law that would exercise the supervisory jurisdiction that would ensure effectiveness of the arbitral procedure itself.
However, there has been some inconsistency across jurisdictions as to which law to apply in the absence of express provision. Following the test set out by the English Court of Appeal, the High Court of Singapore in the case of First Link Investments Corp Ltd v G T Pte Ltd and others  SGHCR took the law of the seat of the arbitration as the starting point and read in a presumption that parties are presumed to want a different (in other words, a neutral) law to apply to the arbitration agreement in the event of a dispute.
Since then, the High Court of Singapore considered the matter afresh in BCY v BCZ  SGHC 249, and preferred the approach taken by the English Court of Appeal in SulAmérica. In BCY, the plaintiff negotiated, but did not sign a sale and purchase agreement. It was therefor never executed. Subsequently, the defendant brought arbitration proceedings against the plaintiff in relation to disputes arising under that sale and purchase agreement. The defendant argued that, although the agreement was never executed, the parties had agreed to arbitrate any disputes arising under it. Therefore, applying the doctrine of separability, the arbitration agreement remained valid, notwithstanding that the substantive contract was not entered into.
Given the nature of the dispute, the identification of which law governed the arbitration agreement was crucial. The defendant argued that New York law (which had been the law governing the sale of purchase agreement) and not Singapore law (the law of the seat) applied. The High Court of Singapore confirmed the three-stage test set out in SulAmérica and went on to hold that, as there was no express choice in the present case, the dispute focused on what could be identified as the implied choice.
It went on to find that:
- where an arbitration agreement is a clause that forms part of the main contract, the governing law of the substantive contract is a strong indication of what was intended to be the governing law of the arbitration agreement, and
- the choice of a seat which is different from that of jurisdiction of the governing law is not, in itself, sufficient to rebut such a strong presumption. If the parties had intended that the law governing the substantive agreement should not apply, then they should have made specific provision for it.
- On the issue of separability, the court did not agree that the doctrine of separability is support for a presumption in favour of a law different from that of the substantive contract. It stated that the doctrine of separability instead serves the narrow purpose of ensuring that the arbitration clause (and, of course, the parties choice of forum for a dispute) remains effective, even if the substantive contract is found to be invalid. Separability does not equate to the entire independence of the arbitration clause from the underlying contract.
For practitioners, the decision in BCY strongly indicates that the approach set out by the court in SulAmérica should be seen as the widely accepted approach. However, there has since been a decision of the United Kingdom Supreme Court, on appeal from the English Court of Appeal, which now serves the leading authority on the issue.
The case of Enka v OOO ‘Insurance Company Chubb’ & Others bears some detailed consideration. Enka was engaged as a subcontractor in the construction of a power plant in Russia. Its substantive contract included an arbitration agreement that provided for a London-seated International Chamber of Commerce arbitration. However, that agreement did not set out which law governed the arbitration agreement itself. Moreover, the substantive contract did not contain a governing law provision either.
There was a fire at the power plant and Chubb Insurance was required to pay US$400 million to those it had covered against fire damage. Through insurer subrogation, Chubb brought an action alleging that the fire had been caused by defective works undertaken by Enka. It duly filed claims against Enka (and ten other parties) in the Moscow Arbitrazh Court.
Shortly thereafter, Enka issued proceedings in the English Commercial Court and sought an anti-suit injunction in order to restrain Chubb in the Moscow proceedings and to compel it to abandon those proceedings. Enka also sought a declaration that Chubb was bound by the arbitration agreement and, at about the same time, it filed an application before the Moscow Court to dismiss Chubb’s action there (given what it asserted was a valid arbitration agreement).
At first instance, the English High Court refused to grant an anti-suit injunction to restrain Chubb from pursuing its action before the Moscow Court, ruling that the English High Court was not the proper forum to decide the matters covered by the arbitration agreement and its applicability to the proceedings in Moscow.
On appeal to the English Court of Appeal ( EWCA Civ 574), the English Court of Appeal reversed the decision of the High Court and granted the anti-suit injunction. In doing so, it considered in detail the appropriate way in which a court should approach a determination as to which law governs an arbitration agreement where the parties have not made an express choice. In its judgment, it departed from Sulamérica in the following manner by holding that:
The three-stage Sulamérica test was the appropriate one BUT:
- where the substantive contract contains an express choice of law, it will be a matter of construction of the whole of that contract, including the arbitration agreement itself, whether the law governing the arbitration agreement is the same as the law governing the contract, and
- where the governing law of the substantive contract is the same as the lex arbitri (where that is the law of the seat as it will almost always be), the presumption will be that the parties intended the same law to govern the underlying dispute and the arbitration agreement.
If the parties have chosen a seat of arbitration (and with it the lex arbitri is the law of the seat) that is different from the governing law of the substantive contract, as a general rule, it will be presumed that the parties have impliedly chosen the seat of the arbitration as governing the arbitration agreement, unless there are any particular features or factors that point to powerful reasons to the contrary.
The national court of the seat of the arbitration will have jurisdiction to hear applications for anti-suit injunctions in support of arbitrations seated there, irrespective of the law governing the relevant arbitration agreement. Chubb Insurance then appealed to the United Kingdom Supreme Court. The five-judge court arrived at a majority decision of 3–2, with the majority holding that:
- Common law rules are to be applied in deciding which law governs an arbitration agreement.
- Applying those rules, the majority confirmed the three stage test as originally set out in SulAmérica. In applying that test, however, the English Courts should apply the ordinary rules of contractual interpretation that are found in English law as the law of the forum.
- Generally, in circumstances where the parties have made neither an express nor implied choice as to the law governing the arbitration agreement, but have chosen the law governing the substantive contract, then that choice of law would also govern the arbitration agreement.
- The Court of Appeal was wrong to hold that there is a “strong presumption” that, by nominating the arbitral seat, the parties have impliedly chosen the law of the seat as governing the arbitration agreement. Although the choice of the seat could, in certain instances, give rise to such an inference, no general inference may be drawn from the choice of seat.
- Where neither an express nor implied choice has been made as to the law governing the arbitration agreement, the court should determine, objectively and irrespective of the parties’ intention, that law with which the arbitration agreement has its “closest connection”. That determination is an objective question of pure law.
- However, generally, an arbitration agreement will have its closest connection with the law of the seat of the arbitration because the seat is where the proceeding will legally take place, such an approach is consistent with the New York Convention and is likely to accord with the reasonable expectation of the parties who have chosen a legal place to have their dispute determined, and will bring about greater legal certainty for parties.
- On the facts of the case, in the absence of an express or implied choice by the parties, the arbitration agreement was governed by the law of the seat (the law of England), given that it was the law with which the arbitration agreement was most closely connected.
The recent case law and unfolding developments should serve to emphasise that parties should, as a matter of good practice, expressly state the law governing the arbitration agreement.
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International Arbitration: Frameworks and Drafting an Arbitration Agreement
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